2010 TAXATION LAW BAR EXAMINATION QUESTIONS

ANSWER BRIEFLY

a. What is the "all events test"? Explain briefly. (2%)

The “all events test” is a test applied in the realization of income and expense by an accrual-basis
taxpayer. The test requires (1) the fixing of a right to the income or liability to pay; and (2) the
availability of reasonably accurate determination of such income or liability, to warrant the
inclusion of the income or expense in the gross income or deductions during the taxable year.
(CIR v. Isabela Cultural Corporation, G.R. No. 172231, Feb. 12, 2007)

b. What is the "immediacy test"? Explain briefly. (2%)

The “immediacy test” is applied to determine whether the accumulation of after tax profits by a
domestic or resident foreign corporation is really for the reasonable needs of the business. Under
this test, the reasonable needs of the business are construed to mean the immediate needs of the
business, including reasonably anticipated needs. The corporation should be able to prove an
immediate need for the accumulation of earnings and profits, or the direct correlation of
anticipated needs to such accumulation of profits to justify the said accumulation (Sec 3, RR No.
2-2001; Mertens, Law of Federal Income Taxation, Vol. 7, Chapter 39, p. 103, cited in Manila
Wine Merchants, Inc. v. CIR, G.R. No. L-26145, Feb. 20, 1984)

c. What is the "rational basis" test? Explain briefly. (2%)

The “rational basis test” is applied to gauge the constitutionality of an assailed law in the face of
an equal protection challenge. It has been held that “in areas of social and economic policy, a
statutory classification that neither proceeds along suspect lines nor infringes constitutional
rights must be upheld against equal protection challenge if there is any reasonably conceivable
state of facts that could provide a rational basis for the classification.” Under the rational basis
test, it is sufficient that the legislative classification is rationally related to achieving some
legitimate State interest (British American Tobacco v. Camacho and Parayno, G.R. No. 163583,
April 5, 2009).
True or False. (1% each)

a. Gains realized by the investor upon redemption of shares of stock in a mutual fund
company are exempt from income tax.
True. (Sec 32 (B)(7)(h), NIRC)
b. A corporation can claim the optional standard deduction equivalent to 40% of its gross
sales or receipts, as the case may be.
False. (Sec 34 (L), NIRC, as amended by RA No. 9504)
c. Premium payment for health insurance of an individual who is an employee in an
amount of P2,500 per year may be deducted from gross income if his gross salary per year
is not more than P250,000.
False. (Sec 34 (M), NIRC)
d. The Tax Code allows an individual taxpayer to pay in two equal installments, the first
installment to be paid at the time the return is filed, and the second on or before July 15 of
the same year, if his tax due exceeds P2,000.
True. (Sec 56 (A)(2), NIRC)
e. An individual taxpayer can adopt either the calendar or fiscal period for purposes of
filing his income tax return.
False. (Sec 43, NIRC)
f. The capitalization rules may be resorted to by the BIR in order to compel corporate
taxpayers to declare dividends to their stockholders regularly.
True. (Sec 244, NIRC; Rev. Reg. No. 2-2001 implementing Sec 29, NIRC)
g. Informer’s reward is subject to a final withholding tax of 10%.
True. (Sec 282, NIRC)
h. A non-resident alien who stays in the Philippines for less than 180 days during the
calendar year shall be entitled to personal exemption not to exceed the amount allowed to
citizens of the Philippines by the country of which he is subject or citizen.
False. (Sec 25 (A)(1) in relation to Sec 35, NIRC)

ESSAY/COMPUTATION
A. Mirador, Inc., a domestic corporation, filed its Annual Income Tax Return for its
taxable year 2008 on April 15, 2009. In the Return, it reflected an income tax overpayment
of P1,000,000.00 and indicated its choice to carry-over the overpayment as an automatic
tax credit against its income tax liabilities in subsequent years. On April 15, 2010, it filed its
Annual Income Tax Return for its taxable year 2009 reflecting a taxable loss and an
income tax overpayment for the current year 2009 in the amount of P500,000.00 and its
income tax overpayment for the prior year 2008 of P1,000,000.00.
In its 2009 Return, the corporation indicated its option to claim for refund the total income
tax overpayment of P1,500,000.00.Choose which of the following statements is correct.
a. Mirador, Inc. may claim as refund the total income tax overpayment of P1,500,000.00
reflected in its income taxreturn for its taxable year 2009;
b. It may claim as refund the amount of P500,000.00 representing its income tax overpayment
for its taxable year 2009; or
c. No amount may be claimed as refund. Explain the basis of your answer. (5%)
B. It may claim as refund the amount of P500,000 representing its income tax overpayment for
its taxable year 2009. Since the taxpayer has opted to carry-over the P1 million overpaid income
tax for taxable year 2008, said option is considered irrevocable and no application for cash
refund shall be allowed for it (Sec 76, NIRC; CIR v. Bank of Philippine Island, G.R. No.
178490, July 7, 2009).

B. What are the conditions that must be complied with before the Court of Tax Appeals
may suspend the collection of national internal revenue taxes? (3%)
The CTA may suspend the collection of internal revenue taxes if the following conditions are
met: 1. the case is pending appeal with the CTA; 2. in the opinion of the Court the collection will
jeopardize the interest of the Government and/or
the taxpayer; and 3. the taxpayer is willing to deposit in Court the amount being collected or to
file a surety bond for not more than double the amount of the tax (Sec 11, RA 1125, as amended
by RA 9282).

C. XYZ Shipping Corporation is a branch of an international shipping line with voyages

between Manila and the West Coast of the U.S. The company’s vessels load and unload
cargoes at the Port of Manila, albeit it does not have a branch or sales office in Manila. All
the bills of lading and invoices are issued by the branch office in Makati which is also the
company’s principal office. The City of Manila enacted an ordinance levying a 2% tax on
gross receipts of shipping lines using the Port of Manila. Can the City Government of
Manila legally impose said levy on the corporation? Explain. (3%)
No, Manila cannot legally levy the 2% Gross Receipts Tax on the shipping line, because taxes on
the gross receipts of transportation contractors and passengers or freight by hire and common
carriers by air, land or water is a limitation on the exercise of taxing powers by local government
units (Sec 133 (j), LGC).
AA: No. Since the gross receipts of an international shipping company is subject to tax under the
Internal Revenue Code, the power to tax is impliedly withheld from local government units. This
is the “rule on preemption or exclusionary rule” which applies unless by express provision of
law, LGUs are given the power to tax that field already covered by the taxing power of the
National government (Victorias Milling Co., Inc. v. Mun. of Victorias, L-2113, Sept 27, 1968;
Sec 133, LGC).

D. A inherited a two-storey building in Makati from his father, a real estate broker in the
‘60s. A group of Tibetan monks approached A and offered to lease the building in order to
use it as a venue for their Buddhist rituals and ceremonies. A accepted the rental of P1
million for the whole year. The following year, the City Assessor issued an assessment
against A for non-payment of real property taxes. Is the assessor justified in assessing A’s
deficiency real property taxes? Explain. (3%)
No. The property is exempt from real property tax by virtue of the beneficial use thereof by the
Tibetan monks for their religious rituals and ceremonies. A property that is actually, directly and
exclusively used for religious purposes is exempt from the real property tax (Sec 234, LGC; Sec
28(3), Article IV, Phil. Constitution). The test of exemption from the tax is not ownership but
beneficial use of the property (City of Baguio v. Busuego, L-29772, Sept 18, 1980).

E. Don Sebastian, single but head of the family, Filipino, and resident of Pasig City, died
intestate on November 15, 2009. He left the following properties and interests:
House and lot (family home) in Pasig 800,000
Vacation house and lot in Florida, USA 1,500,000
Agricultural land in Naic, Cavite which he inherited from his father 2,000,000
Car which is being used by his brother in Cavite 500,000
Proceeds of life insurance where he named his estate as irrevocable beneficiary 1,000,000
Household furnitures and appliances 1,000,000
Claims against a cousin who has assets of P10,000 and liabilities of P100,000 100,000
Shares of stock in ABC Corp, a domestic enterprise 100,000
The expenses and charges on the estate are as follows:
Funeral Expenses 250,000
Legal fees for the settlement of the estate 500,000
Medical expenses of last illness 600,000
Claims against the estate 300,000
The compulsory heirs of Don Sebastian approach you and seek your assistance in the
settlement of his estate for which they have agreed to the above-stated professional fees.
Specifically, they request you to explain and discuss with them the following questions. You
oblige:
a. What are the properties and interests that should be included in the computation of the
gross estate of the decedent?
Explain. (2.5%)
All the properties and interests enumerated in the problem should be included in the gross estate
if the decedent. The composition of a gross estate of a decedent who is a citizen of the
Philippines includes all properties, tangible or intangible, wherever situated and to the extent of
the interest that he has thereon at the time of his death (Sec 85, NIRC).
b. What is the net taxable estate of the decedent? Explain. (2.5%)
The net taxable extent of the decedent is P3,700,000.00. From the gross estate of P7 million the
following deductions are allowed: (1) funeral expenses of P 200,000 which is the maximum
allowed by law; (2) legal fees amounting to P500,000; (3) medical expenses not to exceed
P500,000; (4) Claims against the estate of P300,000; (5) family home equivalent to its fair
market value (not to exceed P1 million) of P800,000; and (6) standard deduction of P1 million,
or a total allowable deduction of P3,300,000.00 (Sec 86, NIRC). The claim against the cousin
amounting to P100, 000, although included in the gross estate, cannot be claimed as a deduction
because the debtor is not yet declared insolvent. Likewise, the inherited property cannot give rise
to a vanishing deduction for want of sufficient factual basis (Sec 86, NIRC).
c. When is the due date for filing and payment of the applicable tax return and tax? Are
these dates extendible? If so, under what conditions or requirements? (2.5%)
The filing of the return and payment of the tax is within 6 months from date of death following
the pay-as-you-file concept. The period to file return is extendible for a maximum of 30 days
under meritorious cases as maybe determined by the Commissioner. The payment of the estate
tax may also be extended when the Commissioner finds that the payment of the tax on the due
date would impose undue hardship on the estate or any of the heirs. The period of extension to
pay shall not exceed 5 years if the estate is settled through the courts, or shall not exceed 2 years
if settled extrajudicially. The Commissioner may require the executor, or administrator, or the
beneficiary to furnish a bond in an amount not more than double the amount of estate tax due
(Sec 91, NIRC).
d. If X, one of the compulsory heirs, renounces his share in the inheritance in favor of the
other co-heirs, is there any tax implication of X’s renunciation? What about the other
coheirs? (2.5%)
If the renunciation is a general renunciation such that the share of the heir who waives his right
to the inheritance goes to the other co-heirs in accordance with their respective interest in the
inheritance, the law on accretion applies and the property waived is considered to pass through
the other co-heirs by inheritance; hence, it has no tax implication. Undoubtedly, when the
compulsory heir renounced his share in the inheritance, he did not donate the property which did
not become his. Such being the case, the renunciation is not subject to the donor’s tax. If it is not
a general renunciation in favor of the other co-heirs, the heir renouncing his right is considered to
have made a donation and the renunciation is subject to donor’s tax. In both cases, however, the
renunciation has no tax implication to the other co-heirs (BIR Ruling
No. DA (DT-039) 396-09, dated July 23, 2009).

F. A is a travelling salesman working full time for Nu Skin Products. He receives a monthly
salary plus 3% commission on his sales in a Southern province where he is based. He
regularly uses his own car to maximize his visits even to far flung areas. One fine day a
group of militants seized his car. He was notified the following day by the police that the
marines and the militants had a bloody encounter and his car was completely destroyed
after a grenade hit it. A wants to file a claim for casualty loss. Explain the legal basis of
your tax advice. (3%)
A is not entitled to claim a casualty loss because all of his income partake the nature of
compensation income. Taxpayers earning compensation income arising from personal services
under an employee-employer relationship are not allowed to claim deduction except that allowed
under Sec 34(M) referring only to the P2,400 health and/or hospitalization insurance premium;
perforce the claim of casualty loss has no legal basis (Sec 34, NIRC).

G. In 2009, Caruso, a resident Filipino citizen, received dividend income from a U.S.-based
corporation which owns a chain of Filipino restaurants in the West Coast, U.S.A. The
dividend remitted to Caruso is subject to U.S. withholding tax with respect to a non-
resident alien like Caruso.
a. What will be your advice to Caruso in order to lessen the impact of possible double
taxation on the same income? (3%)
Caruso has the option either to claim the amount of income tax withheld in U.S. as deduction
from his gross income in the Philippines, or to claim it as a tax credit (Sec 34 (C )(1)(b), NIRC).
b. Would your answer in A. be the same if Caruso became a U.S. immigrant in 2008 and
had become a non-resident Filipino citizen? Explain the difference in treatment for
Philippine income tax purposes. (3%)
No. The income from abroad of a non-resident citizen is exempt from the Philippine income tax;
hence, there is no
international double taxation on said income (Sec 23, NIRC).

H. ABC, a domestic corporation, entered into a software license agreement with XYZ, a
non-resident foreign corporation based in the U.S. Under the agreement which the parties
forged in the U.S., XYZ granted ABC the right to use a computer system program and to
avail of technical know-how relative to such program. In consideration for such rights,
ABC agreed to pay 5% of the revenues it receives from customers who will use and apply
the program in the Philippines. Discuss the tax implication of the transaction. (5%)
The amount payable under the agreement is in the nature of royalty. The term royalty is broad
enough to include compensation for the use of an intellectual property and supply of technical
know-how as a means of enabling application or enjoyment of any such property or right (Sec
42(4), NIRC). The royalties paid to the non-resident U.S. corporation, equivalent to 5% of the
revenues derived by ABC for the use of the program in the Philippines, is subject to a 30% final
withholding tax, unless a lower tax rate is prescribed under an existing tax treaty. (Sec 28(B)(1),
NIRC).